L.B. Foster takes warranty charge against 2Q earnings

L.B. Foster Co. on Wednesday said its second-quarter 2012 earnings and sales declined relative to the comparable quarter in 2011, but noted a solid backlog for rail product orders and also expressed confidence that an ongoing warranty issue with Union Pacific would be resolved.

Earnings missed Wall Street consensus analyst estimates of 90 cents per diluted share by 3 cents. But shares of L.B. Foster were up 1.9% in early afternoon trading Wednesday on the Nasdaq.

Second-quarter net sales of $164.9 million decreased by $6.6 million, or 3.8%, from sales in the second quarter of 2011, but also topped estimates of $160.5 million. The company said the decline was due in part to a 32.0% drop in its Construction segment sales. The company noted its Rail segment sales rose 14.1% compared with last year, however.

The company said it notched a record $212.3 million in booked orders during the quarter, up 69.4% compared with a year ago and the highest in its history, aided by a contract order placed last month for the Honolulu elevated rail transit line now under construction.

Company President and CEO Robert P. Bauer said, "For the last three quarters, we have been reporting on the status of the Union Pacific warranty claim involving the performance of concrete ties made at our Grand Island facility between 2006 and 2011. We have completed sufficient testing and analysis that has helped us better understand Union Pacific's concern. In a combined effort, we analyzed ties in Union Pacific track. In parallel, we conducted more significant forensic analyses of our own.

"Based upon our findings, we believe we have discovered conditions that can shorten the life of a concrete tie. All of this testing, analysis and recent findings, as well as our ability to perform field testing during the second quarter, were critical steps to enable us to uncover and define the scope of the problem and, ultimately, the corrective action plan," Bauer said. "We have taken a $19.0 million charge this quarter to support our corrective action plan. While we are eager to put this problem behind us, we are also very focused on proceeding in a manner that will satisfy our customers."

Bauer added, "It is important to note that our underlying business performance was very good this quarter. Excluding the charge, diluted EPS from continuing operations would have been $0.87 and our backlog ended the quarter at $255.3 million. The record bookings this quarter is a reflection of our customer's confidence in L.B. Foster. Winning several marquee projects this quarter has raised our confidence in the rail and energy markets."

Gross profit margin was 7.7%, 720 basis points lower than the prior year, due to the $19.0 million warranty charge recorded in the second quarter to reflect management's best estimate of the cost it expects to incur to settle its product claim.